Tuesday, 8 February 2011

MoD’s offset farce: notes for the CAG

Antony releasing the Defence Production Policy last month, which talks about building up Indian defence industry. The DPP-2011, released the same day, undermines that aim by diluting offsets.

by Ajai Shukla

Business Standard, 8th Feb 11

Defence Minister AK Antony’s apparent probity is set to naught by his dismal lack of judgement. In a heated internal debate on offsets that has polarised his ministry, Antony has backed a group of bureaucrats that argue exactly what foreign arms vendors have lobbied for since offsets were instituted in 2005. They agree that India’s nascent defence industry is incapable of executing the offset projects that would arise from our weapons purchases. Consequently, the 30% plough back that foreign vendors were required to make into the Indian defence industry, on all contracts above Rs 300 crore, has now been permitted in civil aviation, internal security and aviation.

The foreign investment that offsets were to direct into the indigenous development and fabrication of high-tech radars, night-vision devices and missile seekers now seems headed for airliner seat upholstery and carpets; rubber panels for baggage claim conveyer belts; cabin crew training; and passenger management systems. All these are permissible under the MoD’s “liberalised” offset policy, promulgated last month. This is over and above an offset policy already in place for civil aviation. Worryingly, civil aviation offsets have never been audited and there are serious apprehensions about who has benefited from them.

Murdering the offset policy has not satisfied global arms vendors; they want it killed with retrospective effect. Currently, offsets relating to tenders that predate the neutered offset policy of 2011 must still be discharged within the defence industry. These include the multi-billion offset liabilities connected with the medium multi-role combat aircraft (MMRCA); the C-130J Super Hercules transport aircraft; and the P8I Poseidon multi-mission maritime aircraft (MMA). Now this coterie of MoD officials is pushing for the new policy to be applied with retrospective effect.

Also on their tables is another proposal that will delight foreign vendors: permitting transfer of technology (ToT) as an offset. This would be a true freebie, since India’s leverage as a massive arms buyer can ensure that ToT forms part of any deal. Besides, as the MoD knows well, an arbitrary price can be placed on most technologies.

The blinding illogic of these MoD decisions will surely be investigated someday, with questions raised over motivations, just as the 2G telecom scam is being probed today. The files will reveal that the MoD was so divided on this issue that Antony referred the further emasculation of the offsets policy to a committee --- that useful ministerial device for passing the buck.

So let us document how the MoD votes on the dilution of offsets. Supporting foreign vendors, and pooh-poohing CII’s and Ficci’s documented insistence that Indian Defence Inc. can absorb offsets in full, are the officials who spend the defence capital budget on overseas procurements: the defence secretary, and his acquisitions chief. Backing them firmly is the Indian Air Force --- the biggest buyer of foreign weaponry. This group regards offsets as an inconvenient obstacle to overseas procurement, a perspective shared and warmly encouraged by global arms vendors.

Opposing this coterie, and urging that offsets be implemented within the defence industry, is a group with professional stakes in building up the Indian defence industry. This includes the department of defence production, backed by the indigenisation-conscious Indian Navy that has traditionally built its ships in India. The army watches and waits, realising the benefits of indigenous industry but not yet clearly committed like the navy.

Highlighting the impatience of the IAF and the acquisitions wing with offsets, is the indefensible clearance, in violation of multiple MoD rules, of Lockheed Martin’s $275 million offset proposal relating to its billion dollar sale of C-130J Super Hercules aircraft. In what most investigators would consider a conspiracy, the IAF left out a C-130J training simulator from their list of requirements; well knowing that this would be required for mission training. Smartly exploiting that gap, Lockheed Martin offered, as an offset, a simulator at an exorbitantly inflated price. The acquisitions wing illegally granted them offset credit for doing so.

French company, Thales, is getting away with an equally farcical offset proposal relating to its supply of radars to the IAF. While sourcing the radar equipment from France, Thales is discharging its offset obligations by buying accommodation tents (including toilets; kitchens; air-conditioners; and microwaves) from a Gurgaon-based company; and by purchasing motorcycles and vehicles for the radar crews. This is a travesty of what offsets were intended to be: a stimulant for domestic defence industry.

This is happening because Antony --- normally an astute guardian of his reputation, but severely endangering it here --- has failed to create within his ministry an organisation to evaluate and manage offsets. In the resulting vacuum, the acquisitions wing and the department of defence production have each tried to palm off to the other the responsibility for handling offsets. To bypass this passing-the-parcel within the ministry, Antony has been persuaded to pass on the parcel to civil aviation.

This is clearly at odds with the government’s own regulations. The MoD’s “Rules of Business” (Serial 12) holds the ministry responsible for: “Development of the aeronautics industry and coordination among users other than those concerned with the Ministry of Civil Aviation and the Department of Space”. How is the MoD going to administer offsets that arise from defence, but flow into civil aviation, without inter-ministerial coordination?

The logic at the heart of defence offsets is the use of buyers’ leverage to arm-twist vendors into building up what they rightly see as potential competition. But despite their protests, commercial logic would bring the vendors in line. This newspaper has reported in detail how global arms vendors have, over years, systematically protested India’s offset policy even while tying up local partnerships for implementing it. The MoD’s offset dilution of 2011 is an appalling example of snatching defeat from the jaws of victory, a tradition once the preserve of our cricket squad.

Was this mere incompetence or a rigged game? Some day, not far away, an investigation will decide.

18 comments:

Anonymous
said...

Clearly some where we are lacking... look at the chinks they can reverse engineer any thing... they land thier hands on... technology, product... you name it... Here we are stuggling with DPP, offset and what not... Nobody is going to eat and digest technology for us... No pain... No Gain...

shows the true colours of the congress' corrupt governance. another enquiry. another commitee. more 20 years of multi agency investigation and finally clean chit as most of the accused would have been dead by that time....and we don't malign our dead...all this time the perpetrators would be enjoying their life with cavier and champagne....3 cheers for Indian DEMOCRACY

"They agree that India’s nascent defence industry is incapable of executing the offset projects that would arise from our weapons purchases."

Isn't this true? Do we have a private defence industry?Is our electronic industry as advanced as China or Taiwan to absorb the offset work? If we were, HAL would have sub contracted some work to them rather than facing non completion complaints for IAF. If we demand without having the capability, these contracts will be delayed for ever.

I read your articles with much interest and appreciate your frank and open views.

As a close follower of the defence offset policy that was initially envisaged for the growth of our indigenous defence industries, it pains me to see in what direction it is headed for? And at the end of the day what are we achieving by it? Is it really meant for the growth and self reliance of our defence industries or is to fill private coffers by allowing waivers to these foreign vendors who in hearts of hearts really do not wish our indigenous defence industry to grow as it affects their business strategy and India’s less dependence on them for futuristic weaponry equipment?

Sadly, I get a feel that even after so many years of India’s independence we still have a desire to be slaves to foreigners otherwise why would our spineless leaders and decision makers in the Ministry of Defence want to submit themselves so meekly into a trap that our future generations are surly going to repent. I can only urge the so called ‘Mr Clean of our Defence Ministry’ to stand up and take a note of what is happening around in his ministry and not get bullied by vested interested ‘Babus’ who are supporting these so called business goons of foreign origin to dominate and push around our policies!!!

Ajaiji, kiddos to you for at least voicing your opinion and enlightening us with a scam that will evidently in making.

My god! People are getting bolder and audacious in circumventing guidelines prepared to help the country achieve self reliance. It is never in the best interests of the sellers for us to achieve self reliance. Is there any doubt now in anyone's mind why DRDO and other Indian organization plays this game too on the other side.

I was of the view that as much as there is corruption in defence there is truck loads of incompetence too. Things going as they are we will never see a locally developed engine on a commercial or fighter plane, forget about radars. LM and Boeing look set to bleed us just like the russians did. The only hope is by the end of this year people see the folly and try to reverse this stupid policy. Try to win more funds from finance ministry for local R n D with carefully monitored timeframes and progress. Involve private sector wherever possible especially in manufacturing. Tejas needs to be forced down IAF's throat, once they are saddled with 200 LCA's they will be comitted to nurturing and improving it further.

Offsets have never created a defence industry anywhere in the world. So, crying after offsets as a means to jumpstart Indian defence industry is quite pointless. It serves only the 'Chillar-minded' local sub-contractors. The only way to create an Indian defence industry is to make the global vendors set up manufacturing units in India, even with 100% ownership. The economics (including high custom duties and low excise duties on the inputs) will ensure local sourcing. More importantly, the hiring and training of the locals in technical and managerial funcitons in such factories will deliver the best bang for the buck in terms of creating a large, world-class talent pool for the Indian defence industry.

It is simple. G.O.I is taking bribes from foreigners. And this is destroying the 10s of billions of dollars of leverage that India would otherwise have in the coming years. Even a country like Turkey does overhaul and maintenance services for American made aircraft. India has much much more levarage than Turkey but thanks to Congress bribe taking India will not learn any know-how or do-how because foreign companies can buy mangoes to fulfill their offset obligations. This is a golden oppurtunity. This is an area China cannot compete in because Western weapon systems are largely off limits to them. And other Asian countries don't have the purchasing power leverage that India has. It is a Golden oppurtunity for Indian industry get sophisticated do-how and know-how from the west. And even if a fraction of that had gone to Indian private companies they would have figured out how to commercially exploit such do-how and know-how further. Instead tents and toilets are being counted as offsets. The corrupt government is a reflection of the people who vote in such devils and don't seem to mind these corruption scandals.

Looks like the old "smoke n mirrors" mthod to raise funds for political parties. Offsets are definitely a Chillar game..100% in-country manufacturing facilities is the way...perhaps borrowing a leaf out of the Automotive Industry style eco-systems with local manufacturers providing Just-in-time products ala Maruti. On the buy side, IAF and other users of the products should be forced to accept the products and commisssion them under penalties for the manufacturer for blowing deadlines..but that would be a very un-political way to do things..